Hailed for its ambitious plans to “provide unprecedented access to the Chinese market for European investors”, the Comprehensive Agreement on Investment has also raised eyebrows among China’s critics. Tanya Ashreena looks at how far it pushes the boundaries.
Fund managers have welcomed the landmark EU-China Comprehensive Agreement on Investment (CAI), saying it trumps even what China is offering the US.
Ursula von der Leyen, the European Commission president, said that the CAI – which observers have called the most ambitious agreement China has ever concluded with a third country – would “provide unprecedented access to the Chinese market for European investors” and “rebalance Europe’s economic relationship with China”.
Negotiations concluded on December 30 following a call between von der Leyen, European Council president Charles Michel, German chancellor Angela Merkel, French president Emmanuel Macron and Chinese president Xi Jinping.
Although the text of the investment agreement is still awaited, asset managers feel the deal is mutually beneficial. Not only does it guarantee greater access to China for EU investors, allowing European companies to buy or establish new companies in key sectors, it will also help level the playing field for EU companies with Chinese state-owned enterprises (SOEs) and commits China to rules on transparency in subsidies.
In turn, China gains from the transfer of technology and high-end equipment to its industries. Yet asset managers believe China’s human rights record has not been addressed strongly enough, and this could prevent the ratification of the deal in the European Parliament.
Increased market access for EU
The EU will gain market access for its companies to invest in, for example, China’s air transport sector, such as computer reservations and ground handling. It applies also to telecom cloud services, electric cards and international maritime transport.
Joint venture requirements will be also removed for the automotive sector, many financial services and for private hospitals in major cities, as well as for the advertising and real estate sectors and environmental services, such as sewage and waste disposal.
“European business will gain certainty, as China will no longer be able to prohibit access or introduce new discriminatory practices in these sectors,” says Patrick Zweifel, chief economist at Pictet Asset Management.
However, the manufacturing sector, which makes up more than half of EU investment in China, is the “biggest winner”, he says.
“Investment in the manufacturing sector comprises 28% towards the automotive sector and 22% towards basic materials. This is the first time China has committed to market access in this sector with a trade partner.”
‘Level playing field’
China has pledged that SOEs active in the market will take decisions solely based on commercial considerations and will not discriminate against European companies during the buying or selling of goods.
EU companies will be given information and be consulted on subsidies that could have a negative effect on their investments’ interests. On top of this, China will put an end to investment requirements that compel transfer of technology. These measures will “level the playing field” for EU investors, says Lale Akoner, senior market strategist at BNY Mellon Investment Management.
The agreement includes guarantees that will make it easier for European companies to obtain authorisation and complete administrative procedures, as well as secure access to China’s standard-setting bodies.
Aidan Yao, senior emerging Asia economist at Axa Investment Managers in Hong Kong, says: “If you compare what China has offered European businesses under CAI to what it is offering the US under Phase 1 of the trade deal, European firms have been given unprecedented access to the Chinese market.”
Accelerate foreign direct investment
EU investment in China has reached more than €140 billion over the past 20 years, with €120 billion flowing the other way.
However, foreign direct investment flows between the EU and China are relatively small compared to the size of their economies, says Robert Gilhooly, senior emerging markets research economist at Aberdeen Standard Investments (ASI).
“We think China’s economy will probably reach the same size as the US by 2033, barring major setbacks,” he adds. “The EU’s FDI flows into China were only about €140 billion in 2019, compared with €2.8 trillion in the US. As China is a growing consumer market, we may see FDI flows accelerate a bit.”
Axa’s Yao agrees. “Investment has been falling behind in the Sino-European relationship and this deal is critical to allow a catch-up to both sides. China will increase investment in Europe, which will lead to the growth of European economies,” he says.
“If you have EU firms which want to sell assets, you go to the highest bidder and if you look at past years, Chinese buyers have provided a premium over other bidders, so that’s a benefit for the EU.”
Geopolitical win for China
Many have questioned the timing of the deal on the eve of Joe Biden’s inauguration, given that Biden was seeking a trans-Atlantic approach to China.
“China has potentially secured a geopolitical win against the US, by concluding negotiations before Biden comes into office, as the lack of a joint US and EU foreign policy makes it harder for a coherent or strong trans-Atlantic approach on China to be forged,” says ASI’s Gilhooly.
The EU should have waited for Biden to spell out his stance on China, concurs Pictet’s Zweifel. “They made a mistake by doing what Trump did – taking a singular approach,” he says.
But Axa’s Yao disagrees. “At a time when you have rising protectionism between China and the US, having closer ties to Europe can benefit both China and Europe. EU firms get to access a market of 1.4 billion people and one of the fastest-growing economies in the world, with 400 million people in the middle class who want top-notch production goods,” he says.
“Many suggest the EU should have designed policy on China following the US stance, but I think autonomy in policymaking is very important and the EU gains from this.”
China to benefit from technology transfer
While the agreement focuses on opening up the Chinese market to EU investors, China will receive concessions on investments in the manufacturing and energy sectors in Europe – although its stake in European renewable energy companies cannot exceed 5%.
However, China’s biggest gain will be technology transfer, according to Yao. “When China opens up, it will get technology to manufacture internally and get management know-how from firms setting up in China,” he says.
BNY Mellon’s Akoner adds that “Chinese corporates which want to acquire European companies and move up the value chain will also gain”.
Impact on asset management industry limited
The CAI removes joint venture requirements and foreign equity caps for banking, trading in securities and insurance and asset management. But as China had started the process of liberalising its financial services sector before the agreement, the impact on the fund management industry is expected to be limited.
“It makes it easier for asset managers to break into the Chinese market, but I don’t see any massive change from the CAI compared with what is already there,” says Gilhooly.
Additionally, China will undertake commitments on environmental, social and corporate governance (ESG) issues through the CAI.
But although it has agreed to invoke the Paris Agreement on climate change and effectively implement the International Labour Organization conventions it ratified, at the same time as promoting responsible business by companies, fund managers are sceptical.
“Many EU parliamentarians are not sure the Chinese authorities will respect commitments and see it as a controversial agreement,” says Didier Borowski, head of global views at Amundi Asset Management.
He says China’s record of weak human rights and forced labour, and its treatment of the Uighur Minority, may prevent the agreement from passing in the European Parliament in the next six to eight months.
Akoner agrees. “The agreement has been reached only in principle. Objections may be raised in parliament since there is a growing criticism of China’s labour standards and Beijing’s policies on Hong Kong,” she says.
Gilhooly feels that not only is China’s commitment weak in terms of wording, “it is difficult to judge and enforce”, which appears to be a concession to the Chinese.
“To expect China to uphold commitments on human rights and forced labour is perhaps a bit of wishful thinking, but the deal will probably be ratified by the EU,” he says. “Human rights will be the main reason it could not pass, while the CAI could also come under pressure by the Biden administration, which voiced disappointment that it was created.”
Proponents of CAI nonetheless feel European negotiators have pushed the boundaries with China. Phase 1 of the trade deal with the US deals with forced labour in less detail, while the Regional Comprehensive Economic Partnership signed between Australia, Korea and Japan does not even mention it.
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